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Income Share Agreements: An Alternative to Traditional College Financing

Many students rely on student loans as a way of covering college expenses. According to the most recent data, among all undergraduate students, 36 percent borrow federal loans and 6 percent borrow private loans to finance their education. Students’ loan repayments often exceed their ability to repay, leading to financial distress or default. In response, federal policymakers have introduced income-driven loan repayment options, such Income Based Repayment and Pay-As-You-Earn.

Income share agreements (ISAs) are another income-driven college financing option that has gained recent attention. With an ISA, an investor provides a student with the funds required to pay for college and, in return, the student promises to pay a percentage of their income for a number of years after leaving school. ISAs share many of the advantages of income-driven loan repayment, but ISAs are based on a time period rather than a debt amount. Recipients could end up paying more or less than they originally receive over the course of the agreement.

In spite of the attention ISAs have received, there is still little known about them. These resources offer a better understanding of how, and for whom, ISAs may work. With this knowledge, innovative financial aid practices can be identified and more broadly piloted to increase students’ access to affordable higher education.

This first brief in a series about income share agreements looks at the potential of ISAs to serve low-income undergraduate students by examining the underwriting criteria used to select ISA recipients, estimating the size of the ISA market given its current structure and funding providers, and estimating the number of students who might plausibly be offered an ISA in an expanded market.

In this blog post, AIR scholar Audrey Peek explores income-share agreements (ISAs), a private form of financial aid that offers cash for college now in return for a percentage of students’ future earnings over a set time. Peek contends ISAs are an innovative way to pay for college that might benefit some students, but which aren’t likely to reach their full potential without fundamentally rethinking who they could serve and how funders are repaid.

The second in a series about income share agreements, this brief addresses the likely impact of ISAs on how campus financial aid offices will award student aid and the implications of ISAs for campus reporting on student aid, drawing on expertise from financial aid officers and the National Association of Student Financial Aid Administrators.

As Purdue University and other schools prepare to offer income share agreements (ISAs) to students, these new programs could put students in a sticky situation. AIR researcher Audrey Peek explains that if they don’t understand the tradeoffs of loans versus ISAs, students could end up replacing their federal loans with much more expensive ISAs.

This brief, the fourth in a series about ISAs, addresses evidence that suggests loan aversion may be especially prevalent among underserved and underrepresented students. The brief concludes that ISAs could provide an alternative to student loans—in particular, for loan-averse individuals whose views of student debt are determined primarily by negative experiences with debt among family and friends, thereby removing one key barrier to college-going for this population.